Pressure from presidents on central bankers is nothing new, yet President Trump has taken Fed-bashing to a new level, some observers say. While the prospect of rising interest rates has clearly rattled the stock market in the last two weeks, the Fed chairman can't be faulted for steering the central bank towards a more traditional monetary policy.

"I give the Fed and Chairman Powell high grades," said Brian Nick, chief investment strategist for Nuveen. "The rate hikes have been judicious and they haven't spooked the bond market.

"Powell speaks more plainly than many central bankers, and I think that helps."

The stock market is still hanging on Powell's every word, of course. Statements by Fed members — particularly the chairman — always provide fodder for market anxiety. The latest utterance from the Fed chairman that sent shock waves through the market was his assertion in a recent PBS interview that we are "a long way from neutral [interest rates] at this point."

So how long is a long way and what is "neutral" — neither too accommodative nor restrictive to the economy — in a still abnormal policy environment?

"You can go down the micromanagement rat-hole and analyze every nuance of every word that Fed members say," said Jeffrey Rosenberg, chief fixed income strategist for BlackRock. High frequency trading on Fed-speak is known to rock the markets, usually negatively. "There's an entire industry based on it."

Rosenberg, too, thinks the Fed has done an admirable job shifting policy without upsetting the markets too dramatically. It has raised interest rates seven times in the last two years and begun to reduce its now $4.2 trillion portfolio of Treasury bonds and mortgage-backed securities. Rosenberg thinks the Fed Open Market Committee's deletion of language in its last statement about its monetary policy being accommodative was a big turning point.

"That was a major inflection point," said Rosenberg. "The Fed has laid out a path and shifted gears in a big way.

"I think they're doing pretty well."

The Fed expects that the business cycle will peak in the next two years. Most people think they will be done raising rates next year.

Brian Nick

chief investment strategist for Nuveen

From an interest-rate policy perspective, the Fed is pursuing a traditional course of slowly raising rates. While inflation remains muted, unemployment is below 4 percent and the U.S. economy continues to exceed expectations. Productivity of 2.9 percent in the second quarter was the first indication that corporate capital expenditures could be having a positive effect on the economy. Accelerated by last year's tax cuts and increased government spending, the economy appears headed for another strong quarter and could post 3 percent real growth this year.

The bond market appears to finally believe the economic cycle may continue and that the Fed will make good on its plans to raise rates again in December and up to three more times next year. The 10-year Treasury bond yield recently rose above 3.2 percent to its highest point since 2011 before retreating in the last two weeks.

"The Fed expects that the business cycle will peak in the next two years," said Nick. "Most people think they will be done raising rates next year."

Considering the Fed's traditional dual mandate of full employment and price stability, this is about as good as it gets. The very big shoe yet to drop, however, is how the Fed will deal with the legacy of the financial crisis and its own response to it.

Zero interest rates and massive financial asset purchases by a central bank are not normal. And keeping rates near zero for years on end and holding trillions of dollars worth of Treasury bonds and mortgage-backed securities for an extended period is not normal. Interest rates have risen off the floor, but the Fed's overall operating framework, including the appropriate size of its balance sheet, remains an open question.

Chris Wattie | Reuters

"The Fed wants the market to focus on the simpler story of interest rate normalization," said Rosenberg. "But when it comes to the longer-running debate on Fed policy in terms of the effectiveness of the response to the financial crisis, its persistence and the slowness of withdrawal from that response, it's too early to tell."

It is clear, however, that financial market conditions have become a much bigger influence on Fed policy making. At the Fed's Jackson Hole meeting this year, Chairman Powell expressed as much concern with "destabilizing excesses" in financial markets as he did with price levels in the economy.

The strategy for recovery from the financial crisis was to reflate asset values by dropping risk-free rates to zero and pushing investors back into risky assets like stocks. The gambit worked. Housing prices have recovered, the stock market set new highs before its recent tumble and the premiums paid for virtually all riskier assets — excluding emerging markets — are still near historic lows. Keeping asset values high and preserving the wealth effect that has fueled consumer and now corporate spending is crucial to the health of the economy.

"In the post-crisis era, market conditions have been elevated to another mandate for the Fed," suggested Rosenberg. "It's not official, but without stable markets, the Fed can't be successful with the rest of its mandate."

The Fed's balance sheet and its size, however, remains an important issue hanging over the market. Investors have thrown tantrums before when changes have been made to quantitative easing programs. The Fed's portfolio of bonds currently stands at $4.2 trillion, about five times the size before the financial crisis. Other central banks around the world have amassed similarly huge portfolios of assets.

There are a lot of areas where we're still in uncharted territory. How many mortgages and bonds does the government need to buy for QE to have the desired effect?

Jeffrey Rosenberg

chief fixed income strategist for BlackRock

The problem is that no one knows what normal is when it comes to the size of a central bank's balance sheet in the post-crisis environment. The cap for reinvesting proceeds from maturing bonds was boosted to $50 billion in October, meaning the Fed's portfolio will shrink by roughly $600 billion annually going forward. Most analysts believe the optimal size is somewhere between the $900 billion level pre-crisis and the current $4.2 trillion. But no one really knows.

"There are a lot of areas where we're still in uncharted territory," said Rosenberg. "How many mortgages and bonds does the government need to buy for QE to have the desired effect?

"It's a conversation we still need to have."

While investors remain focused on interest rate policy, that balance sheet conversation may have serious repercussions for the markets in the future.